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Controversial Pension Deal Struck in California

Gov. Jerry Brown and Democratic lawmakers unveiled a long-awaited deal Tuesday that for the first time would set statewide public pension formulas for new hires in both state and many local government jobs. The plan, which is likely to win approval in the Democratic-controlled Legislature, assumes higher contributions from existing employees and imposes pension caps, and raises the retirement age for new workers.

Gov. Jerry Brown and Democratic lawmakers unveiled a long-awaited deal Tuesday that for the first time would set statewide public pension formulas for new hires in both state and many local government jobs.

Pension experts said the plan, which assumes higher contributions from existing employees and imposes pension caps and raises the retirement age for new workers, falls short of the Democratic governor's own earlier proposal to rein in those costs.

It immediately drew fire from a leading pension reform advocate as insufficient to cut billions of dollars in unfunded obligations on governments' books.

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Brown said in a statement that the plan nevertheless represents a "significant step forward" that will "help to ensure that our public retirement system is sustainable for the long term."

California's public pensions are currently governed by a patchwork of contractual agreements and retirement-system rules. The deal, likely to win approval in the Democratic-controlled Legislature, would bring most of those systems under the same pension standards.

The governor, who has linked pension reform with the success of his November tax hike initiative, has said more than once that voters view the issue as a litmus test of Democrats' stomach for tough choices -- a way to prove that they can be trusted with more revenue.

The biggest future cost savings in Assembly Bill 340 comes from ratcheting down pension formulas for employees hired after Jan. 1, 2013. Those workers would also have to wait another two years or more to earn maximum benefits.

The plan also caps the amount of their salaries that can be figured for pension purposes at $110,000 for workers who participate in Social Security and $130,000 for those who don't, such as teachers and public safety employees.

None of those terms would apply to current employees, however, and relatively few government employees earn six-figure salaries. Local municipalities with stand-alone pension funds aren't covered, including San Francisco, San Diego and Los Angeles.

"The cap wouldn't touch the 95 percent of future employees who make less than the cap," said Dan Pellissier, a former state employee who has led two failed attempts to put a pension overhaul measure on the ballot.

By comparison, the plan that Brown put forward earlier this year included a hybrid pension for new hires that would have combined a smaller guaranteed retirement payout with a variable savings plan similar to a 401(k). The goal would have been to assure each employee 75 percent of their wage as calculated for retirement purposes.

That plan would have touched most future state and local agency employees, not just high-wage earners, Pellissier said. Unions blasted the hybrid idea as one that would deliver lower benefits at higher costs. The state's mammoth public pension fund, CalPERS, gave that plan a lukewarm review that concluded hybrids might not significantly cut costs for the state but would save local public agencies some money.

Lawmakers probably found writing such legislation was too complicated, perhaps impossible, said Daniel J.B. Mitchell, a professor emeritus at UCLA's Anderson Graduate School of Management. It would have required obtaining a guaranteed return from a plan partially based on volatile individual investments.

"The hybrid was the showpiece of Brown's plan," Mitchell said. "But it never appeared to be particularly workable."

One piece of the new pension plan that affects both current and future workers would require employees and employers to split the "normal" cost of pensions evenly. "Normal" pension costs don't include a retirement system's unfunded obligations.

"The unfunded liability question is still lurking out there and threatening the finances of governments across the state," said Pepperdine University political scientist Michael Shires.

While the majority of state workers already contribute half of their normal pension costs or more, most state and local public safety workers such as police and firefighters do not.

Whether the government can impose higher contributions on its current employees without bargaining is debatable, Shires said. He expects the unions to sue.

With the end of their session looming, lawmakers raced to pull together the essential elements of legislation. Members of a joint committee formed last year with the charge to craft pension legislation received bill language an hour before meeting Tuesday evening for an up-or-down vote.

"It's irresponsible," said Sen. Mimi Walters, a Laguna Nigel Republican who serves on the pension committee. "There's no time to vet it."

Union leaders blasted Brown and Democrats for abandoning the bargaining table and unilaterally mandating what they said were needless reforms spurred by politics.

While Brown was still talking about the measure at a Los Angeles news conference, labor officials in Sacramento complained that their members didn't create governments' money problems and said they are tired of serving as scapegoats.

Dave Low, head of the union coalition Californians for Retirement Security, said states and cities have suffered from Wall Street greed that sparked the 2008 financial crisis, not from personnel costs.

"We've seen a concerted effort from Wall Street to say, the problem isn't the banking industry, it's those fat public pensions," even while unions have negotiated concessions, Low said.

From the labor perspective, California's new pension rollback plan is the latest in a series of attacks on collective bargaining, union political fundraising power, wages and benefits.

The overhaul raised the retirement age and lowered the benefits for public employees hired as of Jan. 1 of this year. It also changed the way pensions are calculated, which slices into benefits for workers who were on the job before then.
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